The ugly Bear

Commentary: Bear Stearns' move a good first step but doesn't go far enough

By

DavidWeidner

NEW YORK (MarketWatch) -- It's another earnings season for the brokers and that means it's time for a new installment of The Biggest Loser: Wall Street edition.

If you've seen the early results, you will surely agree the judges are facing their stiffest test yet.

The industry has absorbed about $70 billion in write-downs, and though Bear Stearns Cos.
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share of that total is a relatively small $1.9 billion, it's hard to name another firm that has made so many bad decisions in so many different areas. Talk about a diversified portfolio.

Bear's list of woes are expected to grow today with the first quarterly loss in the firm's 84-year history.

Now the broker's executives led by James Cayne, the firm's chairman and chief executive, are acknowledging the beatdown by agreeing to forgo what could have been tens of millions in bonuses for the year.

The move, which would seem the equitable thing to do in any small- to medium-sized business, is a big departure from corporate America and even more so from Wall Street where rewards for failure can often exceed those provided for success. For instance, the exit packages awarded to Philip Purcell, Charles Prince and Stan O'Neal topped a combined $200 million.

At rival Lehman Brothers Holdings Inc.
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Richard Fuld, chairman and chief executive, is in line to earn close to $50 million for 2007, nearly a 20% raise, even though Lehman stock has fallen 20% in 2007.

Using that same logic, Cayne should be eligible for a 46% raise since that's how far Bear Stearns stock has fallen during the same period. Instead, Cayne will take home close to the $250,000 salary he was paid last year - plus perks such as $1.08 million in tax-related fees he received - and give up his $17 million cash and $14 million in stock bonus.

Those payouts were for 2006, Cayne was probably due far less under those performance-based plans this year, but you never know.

A challenging year

Cayne has definitely earned his pay cut. In addition to the stock decline, Cayne has been criticized for golfing as two hedge funds managed by the firm imploded. At the same time, Bear was losing money on mortgage-related securities. Bear was able to recover its own funds, but its clients weren't as lucky.

In response, he fired his heir apparent, Warren Spector, and laid off 10% of the firm's 15,500 employees at the end of July. Those moves led to a blistering story Nov. 1 in The Wall Street Journal in which he was accused, among other things, of smoking pot.

Meanwhile, investors in those decimated hedge funds sued. Now, federal investigators are probing whether Bear Stearns' employees, acting on inside information, pulled their money out of hedge funds, according to a report in BusinessWeek.

Cayne has more in common with John Mack, the chairman and chief executive of Morgan Stanley, who also shunned a bonus as the brokerage reported its first quarterly loss of $5.7 billion on Tuesday. See full story.

Mack's decision to pass on a bonus will hurt less. Last year he received an $800,000 base salary and had better perks including $6.1 million 401(k) match and $321,848 in personal use of Morgan Stanley's private jet.

Both Mack and Cayne have bankrolled their firms by selling stakes to outside investors. Morgan Stanley sold a 9.9% stake to China Investment Corp. Bear sold a 6% stake to China's Citic Securities Co. Citigroup Inc.
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tapped Abu Dhabi for $7 billion, but the deal came too late to save Prince.

Coming home to roost

So much of the credit crisis now coming back to haunt Wall Street is the result of appetites gone haywire.

Whether it was the temptation to use insider knowledge to exit a collapsing fund before other investors, or packaging a mortgage-backed security even as those mortgages were already close to default, the desire by some to squeeze every last dollar out of a failing business has added fuel to the investor backlash.

The CEO is eating humble pie after gorging all summer.

Cayne's decision this week to decline a bonus amid the turmoil is clearly aimed at easing the backlash. A better move would be for Cayne, 76, to step down, and allow for younger leadership to take control. Instead, the CEO is eating humble pie after gorging all summer.

It's early in our season of The Biggest Loser, but there isn't much suspense. Thursday's results tell the story, and it looks like we have a winner.

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